The global litigation lottery

Commentary: Cross border legal battles are increasing business risk

By

VinceVitkowsky

NEW YORK (MarketWatch) -- Across the globe, citizens and businesses alike are reaping the rewards of an increasingly global economy. These developments bring more choices, investment opportunities and greater access to resources and capital. Unfortunately, there are risks associated with international business, and actions in recent years by various activist groups, trial lawyers and foreign governments are making those risks even larger for companies seeking to do business overseas.

Some activist groups hope to use litigation against American companies to pursue their political and social objectives. The trial lawyers are all too happy to file lawsuits in an attempt to win big awards from international companies. Activists and trial lawyers are joining forces in a growing number of cases against international businesses, and when foreign governments join this alliance, it presents serious problems for U.S. companies attempting to remain competitive in a global marketplace.

Witness the saga of Chevron in Ecuador. Prior to 1992, Texpet, a company that is now a Chevron subsidiary, was a partner with the state-owned oil agency of Ecuador, PetroEcuador. All of its activities were in compliance with existing Ecuadorian laws and regulations, but after the venture ended, a government-supervised audit called for environmental remediation. Texpet conducted a $40 million remediation and public works program, and the government of Ecuador released it from further claims saying it was "formally absolved, liberated and forever freed" from "any claim or litigation by the Government of Ecuador..."

But that final decision did not stop others from using various legal tactics to file more lawsuits. Trial lawyers and activist groups, led by NGO's like Amazon Watch, swept in. In the U.S. courts, where standards of proof are respected, the plaintiffs were resoundingly unsuccessful. Initially, the same was true in Ecuador. The courts there utilized a preliminary evidentiary phase to look at the evidence. That panel's initial findings were very favorable to Texpet.

Then, a new judge replaced a five member panel with a single investigator who was receptive to new government policies and the plaintiffs. The new Ecuadorian government offered full support in gathering "evidence." The new government also turned a blind eye toward PetroEcuador, which continued operating the oilfield operations for the past 17 years despite evidence suggesting the home company was likely responsible for environmental problems in the region -- more than 1,000 spills since 2002. The ultimate outcome remains to be seen, but this sequence suggests a disturbing retreat from the established rule of law and a new form of legal and economic nationalism.

Even in the U.S., recent cases complicate the legal landscape. The focal point here is the Alien Tort Statute, which was originally enacted in 1789 to provide individuals with civil redress for universally recognized violations of international law, such as piracy and offenses against ambassadors.

Since 1980, courts have permitted the statute to be used by non-U.S. citizens to sue private actors. The first wave of actions was directed against individuals who engaged in egregious conduct, such as torture and summary execution. They tended to result in default judgments, because the defendants, who had no assets here which could be used to satisfy any judgments, did not present defenses. At least these cases served the worthy end of highlighting and condemning actual human rights abuses.

The mid-1990s saw a second wave of cases, alleging that corporations directly or indirectly violated international law, or aided and abetted a foreign government's violations, with respect to specific projects. These cases did not go to trial, but adverse publicity and the risk of financial exposure generated some settlements.

Last October, the federal appeals court for the Second Circuit kept the aiding and abetting concept alive in claims brought on behalf of South Africans seeking $400 billion in damages from over 50 U.S., Canadian and European corporations. The plaintiffs alleged that, by doing business in South Africa during the apartheid era, the corporations aided and abetted the human rights violations of the South African government. The Second Circuit allowed the claims to proceed, and established a test based on the murky question of "intent." A request for review by the Supreme Court is pending. Without further guidance, the lower courts will be left on their own to try to apply this test in countless different scenarios.

With developments like these, international litigation makes it virtually impossible to assess business risks. There are limits to what can be done to reduce risks in countries prepared to distort the rule of law. But substantially more can and should be done in the U.S. courts to keep those risks within tolerable limits.

Editor's note: Vince Vitkowsky is a partner in Edwards Angell Palmer & Dodge LLP. His practice focuses on international commercial arbitration and litigation.

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